Before Malcolm Turnbull and the states start haggling over hospital funding, it’s worth looking at why the system costs so much to run. Maybe it’s not just cash, but waste and inefficiencies that need addressing, writes Mike Steketee.

It is the question worth asking before Malcolm Turnbull and the premiers start haggling at today’s COAG meeting over how best to pour more money into hospitals. Yes we are an ageing population and the health system is devising ever more clever ways to treat us.

But that is not all that is going on. If you are 55 or over living in Fairfield in western Sydney, your chances of having knee arthroscopic surgery were 185 per 100,000 people in 2012-13. In Bunbury in Western Australia, the chances were more than seven times greater – 1319 in 100,000.

Are there that many more dicky knees in Bunbury or at least ones that require hospital surgery? Or is it that many older people in Fairfield have been denied necessary surgery?

Despite the evidence that knee arthroscopy is of limited value for people with osteoarthritis and may cause harm, more than 33,000 operations were performed on this age group during 2012-13. Many of these people will have degenerative disease in their knees and will not benefit from this intervention.

It added that, even if you argue the extremes distort the picture and take out the areas with the highest and lowest rates, hospital admission rates for arthroscopy still varied more than four times between local areas.

The Commission found an overall variation of more than seven times for cataract surgery, which was performed 160,489 times on those 40 or over in 2012-13. Age differences between areas do not come anywhere near explaining variations of this size.

For lumbar spine surgery for those 18 and older, the variation was 4.8 times. This included spinal fusion procedures, for which the Commission said there was limited evidence of its effectiveness for painful degenerative back conditions.

John Dwyer, emeritus professor of medicine at the University of NSW, has had a stab at estimating the waste generated by doctors across the whole health system and comes up with a figure of at least $10 billion a year. As they say, a billion here and a billion there and soon you’re talking serious money.

Governments and patients spend a considerable amount of money on health interventions that are irrelevant, duplicative or excessive; provide very low or no benefits; or, in some cases, cause harm.

Despite all this, the Australian health system delivers some of the best outcomes in the world, other than for Indigenous people. But costs are rising rapidly, in part because of too little control over waste and too much emphasis on hospital treatment.

The Productivity Commission paper canvasses some of the weaknesses that apply across the whole health system but often culminate in expensive hospital treatment. It says governments subsidise many health treatments that have not been assessed for clinical and cost effectiveness.

Often clinicians do not realise they are over-diagnosing patients, providing superfluous or harmful treatments or applying valuable treatments in the wrong way. Clinical guidelines … can be an effective way to promote high value medicine but they are often too complex, out of date, lack credibility or poorly implemented.

Doctors are often resistant to change, including in acting on the findings of evidence-based medicine, arguing that their training equips them to know best the needs of individual patients. The way they charge – on a fee-for-service basis – is an incentive to provide more services than are necessary.

“Half of all potentially avoidable hospital admissions in 2013-14 were attributed to chronic conditions,” they added. Under the two year trial, one GP practice will co-ordinate the care of these patients and receive quarterly payments. This shifts the emphasis to improving the overall health of the patient, rather than charging for individual treatments.

Turnbull and Ley hailed this as “one of the biggest health system reforms since the introduction of Medicare 30 years ago.” However, we shouldn’t get too carried away: various forms of co-ordinated care, including for chronic illnesses, have been tried for at least the last 20 years, with mixed results. Nevertheless, an increased emphasis on primary care – that is through GPs and including prevention programs – is crucial to keeping people out of hospital.

These potential savings are before we even start talking about inefficiencies in administering the health system. With both the federal and state governments putting money into public hospitals, there is bureaucratic duplication on a large scale.

Each level of government blames the other for deficiencies in hospitals. As well as blame shifting, each is constantly manoeuvring to shift costs on to the other. For example, hospitals, which are run by the states, are forced to keep elderly patients in beds costing $1200 a day because there are not enough places costing only $200 a day in nursing homes, which are funded by the federal government.

Turnbull is right in suggesting this week that if the states raised more of their own revenue – for example, through his proposal to let them levy income tax – it would make them look more carefully at how money was spent. At the moment, it is much easier to beg Canberra for more money than to make voters cough up through taxes.

It is just that experience suggests that the main effect of Turnbull’s idea would be to put even more pressure on hospitals. In most areas where they already have the power to raise taxes, the states have competed with each other to bid them down, such as through ever more generous exemptions for payroll tax and land tax.

Of course, if Canberra stood firm on the states solving their own problems, it would force them to tackle some of the waste and inefficiency in their spending – either that or allow hospital and other services to run down and cop the wrath of voters. But then the states would just try to blame it on Canberra.

Mike Steketee is a freelance journalist. He was formerly a columnist and national affairs editor for The Australian. This article was first published in The Drum 1 April 2016.